In a March 20, 2014 order, the Federal Energy Regulatory Commission (FERC) declared that a Montana rule requiring qualified facilities (QFs) to win a competitive auction in order to be eligible to sell their output under long-term contracts violated PURPA. The order effectively eviscerates the competitive bidding process in Montana and endangers a number of similar competitive bidding procedures in other states.

PURPA generally requires utilities to purchase the output of QFs at rates tied to the utilities’ avoided cost. A number of states call for QFs to submit bids in a competitive auction or RFP process as a means of both setting an avoided cost rate and awarding contracts. Under the typical procedure, the winning bidders—those quoting the lowest price—receive long-term contracts to sell both capacity and energy to a utility. Losing bidders may sell energy but are not entitled to be paid for capacity. Montana follows a similar procedure, under which a QF can secure a long-term contract with a utility only if it is selected in a all-source competitive solicitation. Losing bidders otherwise are entitled to energy-only rates. Advocates see competitive bidding as preferable to contested rate-making processes, since auctions and RFPs are more efficient, less adversarial, and more likely to benefit ratepayers by lowering the cost of purchases from QFs.

In Hydrodynamics, Inc., 146 FERC ¶ 61,193 (2014), FERC declared that the Montana rule violates PURPA. FERC stated that “requiring a QF to win a competitive solicitation as a condition to obtaining a long-term contract imposes an unreasonable obstacle to obtaining a legally enforceable obligation particularly where, as here, such competitive solicitations are not regularly held.” Id. at P 32.  FERC further held that QFs have the right to compel a utility to purchase their output outside a competitive bidding process—and at a long-term avoided cost rate unless the utility can demonstrate that it needs zero additional capacity.

FERC’s order may render competitive auctions and RFPs impractical. If a QF is not required to submit a winning bid in order to secure a long-term contract with a utility, then the QF has little incentive to participate in the auction or to submit a bid in response to an RFP. Even if a QF participates, it may have no incentive to make its bid as low as possible—if it loses it can later demand that a utility purchase its output at the avoided cost rate established by the winning bid. In short, FERC’s order discourages QFs from actually competing and may invite collusion or manipulation. Either way, the result likely will be higher avoided cost rates, to the detriment of utilities and their ratepayers. Ultimately, if FERC’s order is not reversed or narrowed, it may lead states to abandon competitive auctions and RFPs and to set avoided cost rates solely through contested rate cases.